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BLOG: how to get involved in responsible and ethical investing

Written by: Darius McDermott
Good Money Week, which runs from 8 to 14 October this year, provides investors with a great opportunity to think about how they can invest and make a difference at the same time.

For those who wish to invest responsibly, a good starting point is to look at funds that take ethical, social and environmental issues into account and, the good news is, investors with ethical requirements do not need to sacrifice returns for their principles. According to data site Moneyfacts, ethical funds have outperformed their non-ethical rivals over one, three and five years.

From Sports Direct’s use of zero-hours contracts through to the re-election and pay package of Sky chairman James Murdoch, shareholders can influence the companies they invest in. This can be done by engaging with boards on a whole host of issues, such as remuneration schemes, corporate tax transparency, succession planning and climate change.

If corporate governance is important to you, check out a fund manager’s voting track record at company annual general meetings (AGMs), particularly those where important issues were raised. If environmental and social issues are a consideration, there’s also a raft of funds out there to choose from.

The first step is to think about what is most important to you. What are your aims and priorities? Are you keen to avoid companies that operate in contentious areas, such as tobacco or oil and gas? If so, look for a fund management team that employs ‘negative screening’ by removing companies that do not pass specific criteria.

The alternative is to focus on socially responsible investment (SRI) funds that use ‘positive screening’ to identify companies that are committed to responsible business practices. Alternatively, they may seek to address environmental or social challenges.

The next stage is to examine whether a fund truly adheres to its process and criteria. Is it doing what it says on the tin? You can do this by looking at the top 10 holdings to see if there are any outliers. If so, there could be a loophole in the process.

Most ethical or SRI funds should have a panel in place, comprising external auditors or internal staff, to make sure the investment team sticks to their process.

In my opinion, an ethical or SRI fund also needs full freedom to invest where the team sees the best opportunities. This means it is likely to be ‘benchmark agnostic’ in comparison to non-ethical counterparts, so don’t be concerned if the breakdown of the fund looks different to other investment strategies.

Standard Life Investments UK Ethical is one of our top choices in this space. Manager Lesley Duncan employs ‘no compromises’ ethical screening and draws on the best ideas from the experienced team at Standard Life Investments. It is an approach that has paid off over the past five years, with a 93.8% return versus 68.5% by the average fund in the Investment Association’s (IA) UK All Companies sector.

Edentree Amity UK is another pick. I like the firm’s strong track record of engagement with underlying companies and focus on research. Managed by Sue Round, the fund has returned 70.5% over five years, ahead of 68.5% by the UK All Companies sector average.

Finally, Rathbone Ethical Bond employs negative screening, so no bonds are included in the portfolio that have been issued by mining, arms, gambling, pornography, animal testing, nuclear power, alcohol or tobacco companies. Manager Bryn Jones keeps a keen eye on valuation and credit quality. Over five years, he has achieved an impressive return of 42.5% versus 26.9% by the IA’s sterling corporate bond sector average.

These three funds just go to show that you don’t need to give up performance to pursue ethical objectives. Use Good Money Week as a prompt to put your cash to better use.

Darius McDermott is managing director of Chelsea Financial Services

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